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Tips for Maximizing ASC Real Estate Value

January 3, 2020

Written by Jon Vick & Jason Winokur

Tips for Maximizing ASC Real Estate Value

Many ASC physician-owners also own the underlying real estate and may not realize how valuable that property has become.  Due to the long-term success and profitability of surgery centers, excellent credit history and rent coverage, and the likelihood that the ASC will remain in the same location for many years to come, ASC real estate has become increasingly attractive to real estate investors.  This is reflected in the current competition to buy and leaseback ASC real estate and the high prices being offered.  Today buyers are offering prices that equate to multiples of 14X or more for ASC real estate.  Sellers can realize high selling prices, no change in rent, and retention of control through NNN leases.

The goal of this paper is to provide tips for obtaining the highest possible competitive offers to maximize the value of your ASC real estate. But first some answers to commonly asked questions:

Why sell? ASC property values are high and you are paying ordinary income tax on the rent you are receiving, so your effective ROI is likely in the low single-digits and is not likely to increase with small annual increases in rent.

Why sell now?  See above:  ASC property values are high. The current low interest rate environment allows real estate investors to borrow funds at a lower cost and to increase the price they are offering for your property.  Low interest rates lower the “CAP rate” which increases property values.

When to sell?  You will receive the highest-priced purchase proposals when your ASC is generating solid profits that have shown growth in recent years, and the average age of the physician-partners promises continuation of a successful ASC business.

How to sell?  Engage a brokerage firm that has experience in advising owners of ASC property on lease terms that are attractive to buyers, can market to a large number of national buyers, negotiate among the buyers to arrive at the highest offering price, and advise on how to avoid personal guarantees of the lease.  In addition, the broker should be able to advise the sellers on how to balance rent with ASC EBITDA so as to maximize the total value of the ASC business and real estate.

Tips for sellers of ASC real estate to maximize value:

  • ASC owners should optimize the lease terms and adjust the rent prior to selling a controlling interest in their ASC business, and sell the real estate when they have majority control of the ASC.  After a sale you may not be able to modify the lease terms to benefit the sellers.
  • If you have already sold a controlling interest it is still possible to negotiate an attractive sale/leaseback, but you should select a brokerage firm that has experience in negotiating lease terms with strategic partners to provide incentives that make your partner want to renegotiate the lease.  Real estate buyers usually do not require personal guarantees of the lease if the ASC has a strategic partner.
  • Rent should be market rate which typically is $30/sf to $40/sf NNN, and higher in some markets.  The higher the rent, the greater the selling price.
  • Lease terms should be 10 – 15 years plus renewal options, and be triple-net (NNN) to get the best price and most offers, and leave control in the hands of the sellers.
  • Sales should be made when interest rates are low and there are multiple buyers competing to buy ASC/MOB real estate, which is currently the case
  • Sellers should engage a broker who has national buyers for your property.  National buyers tend to have funds available that they need to deploy, and tend to leave more control in the hands of the sellers.  Ask to see a typical “ASC marketing package” and a summary of previous ASC real estate sales.
  • Obtain competing purchase proposals: sellers will always get a better price and terms when multiple buyers are submitting competing bids.
  • Sellers can take advantage of a 1031 exchange to defer taxes and provide tax-free use of the sales proceeds to reinvest in one or more income-generating properties.  Ask your broker if he has 1031 exchange properties available for you to consider, and if he has a track record of advising on 1031 exchanges.

ASC physician-owners can obtain fair market value rents, current cap rates, and valuations for their ASC business and real estate by contacting ASCs Inc. at 760-751-0250 (CA) or 203-733-8818 (CT).

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